Consumer groups are calling on the life insurance industry to ditch its reliance on commission payments.

A report by ASIC last year found more than a third of all life insurance advice given in Australia failed to comply with the law.

The report also suggested the industry's reliance on up-front commissions was encouraging brokers to sell products that boosted their own bottom line rather than serve the needs of clients.

In its draft response to the report, an industry working group recommended the industry abandon full up-front commissions but retain other forms of commission-based pay.

Gerard Brody, the chief executive of the Consumer Action Law Centre, said that showed a lack of imagination.

"We do welcome that the industry is acknowledging the problems associated with those very high up-front commissions," he said.

"But I guess as long as there is a financial incentive for a licensed life insurance adviser to push certain products, there is little reason to think that consumers will get the advice that's prudent in their interests.

"Rather, it's likely to be associated with the advisers' interests."

The insurance industry said it needed to offer commissions and preferably up front to motivate the sale of insurance policies because Australians were notoriously under-insured.

But Mr Brody said commissions had been around for decades and under-insurance remained a problem.

"We really fail to see why commissions should now be expected to fix the problem of under-insurance that they were never able to fix in the past," he said.

"Obviously the industry are well versed to come up with appropriate models, and if they're wanting to sell a particular service then we'd encourage them to think more broadly about the models that could be used.

"But in the sale of investment advice, we're seeing firms move away to fee-for-service arrangements and other arrangements and we'd encourage the life insurance industry and the advice sector to look similarly to those sort of options that might be available."